17 August 2005

TD Raises Reserves by US$300-million for Further Claims

Financial Post, Barbara Shecter, 17 August 2005

Toronto-Dominion Bank is shelling out US$130-million to settle claims with bankrupt Enron Corp., but there could be far worse news ahead as a massive lawsuit filed by shareholders of the disgraced energy trader works its way through the courts.

Yesterday, TD raised a reserve set aside to cover other liabilities from its relationship with Enron by US$300-million to US$400-million, which will lower earnings by 34 cents a share in the third-quarter.

TD denied liability or wrongdoing in yesterday's settlement, but Ed Clark, TD's chief executive, acknowledged the damage the bank's involvement with Enron has wrought.

"The Enron file has been upsetting to anyone involved in it," he told analysts and investors on a conference call. "It is clear to me ... that no one at TD did anything wrong, but we have been swept up in a system which is causing even innocent participants to pay. This is a real economic cost to the bank, and for that I am truly sorry."

Ten major North American banks faced multi-million-dollar exposure to regulatory sanctions and lawsuits stemming from their relationships with the disgraced energy trader. Enron sunk into bankruptcy protection in 2001 after a massive accounting fraud, and now exists merely to pursue and fight legal claims.

Among other things, banks were accused of helping Enron inflate revenue by disguising loans.

Three Canadian banks -- Canadian Imperial Bank of Commerce, TD and Royal Bank of Canada -- had dealings with Enron. Each was named in the so-called MegaClaims lawsuit filed by Enron for the banks' alleged role in facilitating the scandal. The Canadian banks were also named in a shareholder lawsuit led by the University of California pension fund that was filed in 2003.

The potential impact of the Enron scandal on Canadian banks was ratcheted up this month when CIBC stunned investors with a US$2.4-billion settlement with Enron shareholders.

Analysts don't expect TD to take the pounding CIBC has endured from investors because TD was not among Enron's "tier one" banks and had a smaller role in the company's misfortunes.

Still, analysts at the Dominion Bond Rating Service were mindful of the surprising magnitude of the CIBC settlement in a report released yesterday.

"Although TD's capital levels are reasonable and some reserves are in place, DBRS believes the resolution of class-action lawsuits remains unpredictable," analysts Brenda Lum and Robert Long wrote.

CIBC, which has so far made the biggest settlement with Enron's shareholders, also settled the Enron Megaclaims lawsuit this month for US$250-million.

In late 2003, CIBC paid US$80-million in a settlement with regulators and avoided criminal prosecution by agreeing, in part, to co-operate with an ongoing investigation.

To date, Royal Bank of Canada has paid US$49-million to settle claims with Enron but has not set aside any money to deal with the shareholder suit.

Royal executives have maintained the bank played a small role in the Enron saga, and that it is difficult to estimate the size of an eventual payment to the satisfaction of accountants.

A source close to CIBC said the bank was restrained by similar accounting rules from increasing its $300-million legal reserve, which is now dwarfed by TD's. An increase would have alerted investors to the financial impact of a much larger settlement, and is bound to be an issue if a shareholder-led class action lawsuit gets off the ground in Canada.

Mr. Clark said it would be "reasonable to argue" that TD could settle any claims against it for a small amount, "given the facts" of the bank's involvement in Enron.

"On the other hand, given the uncertainties in this situation, it would seem prudent to increase our reserve," he said.

So far, about US$6.6-billion has been recovered from banks on behalf of Enron shareholders. Enron has extracted about US$670-million through its MegaClaims action.

JP Morgan Chase & Co., which paid US$2.2-billion to settle the class action lawsuit in June, agreed to a further US$350-million payment yesterday in the MegaClaims suit that will go to Enron's creditors.

Jamie Keating, an analyst at RBC Capital Markets, told clients yesterday he is comfortable with TD's remaining US$400-million litigation reserve because he expects the bank to pay out between US$280-million and US$480-million to settle the Enron shareholder lawsuit.

Most of the shareholder settlements so far work out to about 10 times the amount paid to resolve Enron's MegaClaims suit, which would peg TD's liability at closer to US$700-million.

In a report last week before TD increased its litigation reserve by US$300-million, Rob Wessel, an analyst at National Bank Financial, said TD's stronger earnings and larger taxable base in the U.S. could help it weather a settlement as high as $850-million.

Andre-Philippe Hardy, an analyst at Merrill Lynch & Co., said TD's stock price already reflects an unlikely "Enron impact" of $1.8-billion, as a result of the beating the shares took following CIBC's back-to-back legal settlements this month.

TD Tallies U$130 milliion Enron Tab

Bank sets aside further U$300 million, to settle impending suit with investors

The Globe and Mail, Sinclair Stewart, 17 August 2005

Toronto-Dominion Bank took a major step toward prying itself loose from the wreckage of Enron Corp. yesterday, paying $130-million (U.S.) to resolve a legal dispute with the company and setting aside an additional $300-million in reserves to help fund a possible class-action settlement with investors of the infamous energy trader.

TD is absorbing a $238-million (Canadian) after-tax charge this quarter because of the increased legal bills, which will reduce its profit per share by about 34 cents. It now estimates it will cost half a billion dollars to settle the class-action suit and completely sever its ties to the company.

Ed Clark, TD's chief executive officer, insisted that TD was a relative bit player with Enron, a so-called Tier Two bank that never had a close relationship with the company.

Although TD denied any wrongdoing as part of its deal with Enron, Mr. Clark said he felt compelled to settle because of the expense and unpredictability of a prolonged legal battle.

"No one at TD did anything wrong," he told analysts on an early morning conference call. "But we have been swept up in a system which is causing even innocent participants to pay. This is a real economic cost to the bank, and for that, I am truly sorry."

TD is the third Canadian bank in the past few weeks to reach Enron-related settlements. Canadian Imperial Bank of Commerce, the domestic bank with the closest ties to Enron, paid $274-million (U.S.) to settle the "MegaClaims" bankruptcy litigation with Enron and a staggering $2.4-billion to escape from the class-action suit, widely known as the Newby case: the biggest settlement so far among Enron's major financial partners. Royal Bank of Canada paid a total of $49-million to settle with Enron, but is still a defendant in the class action along with TD.

Yesterday's $130-million settlement with Enron is divided into three separate components. TD is paying $50-million to resolve allegations it aided a pervasive accounting fraud at the company, and is forking over $20-million to settle a bankruptcy avoidance claim filed by Enron. It is also committing an additional $60-million so that Enron will allow several third parties to bring claims against the company. TD sold $320-million worth of claims to these third parties after Enron filed for bankruptcy.

TD began stockpiling cash for Enron-related litigation last year, when it took a $300-million (Canadian) provision. This will be augmented by the additional $300-million (U.S.) provision it is swallowing when it reports its quarterly financial results next week, providing TD with combined legal reserves of about $666-million (Canadian). After deducting $160-million for the MegaClaims lawsuit with Enron, TD is left with $506-million, the amount it expects to pay to resolve the Newby class action.

"You can't be absolutely certain that you've got it correct . . . so you take the best shot you can," Dan Marinangeli, TD's chief financial officer, said of the latest provisions. "It's a very difficult assessment. We could be wrong."

Investors clutched at whatever shred of certainty they could find, as TD's stock dropped only modestly to $55.47, a loss of 9 cents on the Toronto Stock Exchange on a day when the entire banking sector lost ground. Most analysts viewed the settlement as a positive development, as it removed a significant cloud overhanging the company.

"The market was concerned that the charge would ultimately be higher than the one they took," said Robert Wessel, an analyst with National Bank Financial Inc. in Toronto.

There does seem to be a rough correlation between the size of the Newby and the MegaClaims settlements. CIBC's class-action bill was just under 10 times the amount it paid to settle with Enron. J.P. Morgan Chase & Co., which agreed to a $350-million (U.S.) settlement with Enron yesterday, paid more than six times that amount when it resolved the Newby case for $2.2-billion.

Judging by this range, it might cost TD between $385-million (Canadian) and $585-million to settle the class action, although the bank cautioned against using this measure as a yardstick.

Both Mr. Clark and Mr. Marinangeli declined to comment on the current state of negotiations with lawyers for the University of California, the lead plaintiff in the Enron class action.

Settlement score card

North American banks have been negotiating legal settlements with Enron Corp. and other litigants over the energy trading giant's 2001 collapse. The total so far:

• MegaClaims litigation (Enron bankruptcy)

CIBC $250-million $24-million $274-million
TD $50-million $80-million $130-million
RBC $25-million $24-million $49-million
J.P. MORGAN $350-million $0 $350-million
Citigroup Inc. Not settled Not settled Not settled

• Newby (Enron class action)

CIBC $2.4-billion
TD Not settled
RBC Not settled
J.P. MORGAN $2.2-billion
Citigroup Inc. $2-billion

• Regulatory settlements (2003)

CIBC $80-million
TD Not applicable
RBC Not applicable
J.P. MORGAN $160-million
Citigroup Inc. $145-million
Merrill Lynch $80-million

Source: Regulatory filings, company reports. Note: All figures in U$

12 August 2005

TD to Weather Enron Easily

Globe and Mail, Omar El-Akkad, 12 August 2005

Toronto-Dominion Bank will likely not take a significant hit to its book value if it settles in the Enron class action lawsuit, unlike the Canadian Imperial Bank of Commerce.

TD could incur a pre-tax charge of roughly $850-million before it impacts the bank's book value, according to National Bank Financial analyst Robert Wessel.

CIBC erased about 25 per cent of its book value last week after announcing a settlement that requires the bank shell out $2.4-billion (U.S.).

However Mr. Wessel thinks TD is not likely to suffer as much if it settles. Mr. Wessel reiterated his “outperform” rating on the stock.

Although TD had dealings with Enron, unlike CIBC, Citigroup and J.P. Morgan, it was not a so-called “Tier 1 banker” for the company,” Mr. Wessel said in a note to clients. Therefore, its reserve level of $300-million (Canadian) appears more in line with many of the other charges taken by similarly exposed U.S. banks and broker-dealers.

Amplifying the damage to CIBC's balance sheet was the lack of a full tax shield, owing to the bank's weak profitability in the U.S, according to Mr. Wessel.

Although TD suffered in the U.S. during the downturn, he believes it is profitable there now, and therefore, he doesn't expect the impact of the charge to be magnified by a lack of taxable income.

TD also generates 30 per cent more accrual earnings than CIBC, allowing for a larger cushion against the looming charge, Mr. Wessel said.

TD is among a group other banks and brokerages, including Royal Bank of Canada, that have yet to reach an agreement in the lawsuit.

10 August 2005

Ameritrade is Accused of Delaying Trades

Kevin O'Hanlon, Associated Press Writer, 10 August 2005

LINCOLN, Neb. -- Online broker Ameritrade is being accused of costing investors $100 million by delaying orders to buy and sell stock.

A class-action lawsuit filed in U.S. District Court alleges that Omaha-based Ameritrade Holding Corp. in one instance took more than an hour to execute a trade, costing an investor more than $26,000.

"Some of the trades ... were delayed hours," said attorney Max Folkenflik, who filed the lawsuit for Telco Group, Inc., a telecommunications company based in Flushing, N.Y., on behalf of all Ameritrade customers since April 2000.

Ameritrade spokeswoman Kim Hillyer declined comment on the lawsuit.

Folkenflik said Ameritrade advertised that the median time to execute all trades from August 2003 to January 2004 was less than three seconds.

In one example listed in the lawsuit, Telco placed an order to buy 175,000 shares on the Nasdaq Stock Market on Jan. 7, 2004. The high price when the trade order was received was $37.54 per share, while the low price was $37.53.

The transaction was received at approximately 3:05 p.m. but was not executed until 4:20 p.m., when the shares were trading at $37.68 per share, according to the lawsuit.

"As a result of Ameritrade's failure to process the trade promptly and at the best possible price under the circumstances ... Telco lost $26,250," according to the lawsuit.

Another class-action lawsuit against Ameritrade is pending.

That lawsuit was filed by David Zannini of Angier, N.C., and three other Ameritrade customers who said the glitches in Ameritrade's online system were caused by "antiquated and inadequate systems and an insufficient number of employees" to help customers make trades.

The lawsuit claims Ameritrade spent its money on recruiting new subscribers rather than fixing the problems.

That action is pending in Douglas County District Court.

The dismissal of another class-action lawsuit against Ameritrade is on appeal to the Nebraska Court of Appeals.

That lawsuit was filed by Mitchell Green of Los Angeles, who agreed in 1998 to pay $20 a month for an Ameritrade service to get real-time information on stocks and options.

His lawsuit, however, alleged that the information on the options -- agreements to buy or sell a stock at a certain time or price -- was "stale."

Douglas County District Judge Gary Randall recently ruled that Ameritrade's promise to make "real time" trades did not amount to a contract with its customers.

Founded by Joe Ricketts of Omaha, Ameritrade rapidly expanded in 1997 when it began offering rates as low as $8 a trade.

Ameritrade recently signed a deal to acquire rival TD Waterhouse USA from TD Bank Financial Group for about $3 billion. The deal would make Ameritrade the largest online broker -- at an estimated 239,000 average daily client trades.

Last year, Ameritrade had net income of $272.3 million, or 64 cents a share on $880.1 million in revenue.

Shares in the company rose 9 cents to $20.06 in afternoon trading on the Nasdaq Stock Market.